Monday, November 27, 2006

UK to become net milk importer?

Two separate respected sources, Sir Stuart Hampson and Kite Consulting, have claimed that the UK could become a net milk importer within a few years. Such a story is manna to the supporters of farm subsidies on food security grounds. It also has a good populist feel, allowing papers to run stories about British tea being drunk with French milk if they so wish. But what is the substance behind these claims?

Sir Stuart Hampson, having just finished his year long stint as chair of the respected Royal Agricultural Society of England, argued that the UK could become a net importer of milk within five years if small dairy farmers continued to be forced out of business.

Sir Stuart made his remarks as Defra released figures showing that England lost on average one dairy farm a day in 2005. He argued that supermarkets had a responsibility to pay a 'fair' price for milk, pointing out that up market Waitrose (part of the John Lewis Partnership of which Sir Stuart is chairman) paid a 3p premium to all farmers.

He commented, 'The price paid to the farner is too low, it is not meeting the cost of he farming. I am trying to draw attention that this is a market that has a fair price. [I am not quite sure what such a price is other than a market clearing price]. The decline in incomes of dairy farmers does give me cause for concern.'

Kite Consulting's Milk Forecasts report warned that the UK is heading for its largest ever under quota position. The report's co-author John Allen said, 'The exodus from the dairy industry is running at 7% and accelerating. In the next three years one in five dairy farmers will quit.' With annual demand at 12.6bn litres if the decline continues supply will be as low as 12.68bn by 2011. That meant that by November of that year, when supply is seasonally at its lowest, the UK could see a real milk shortage.

The government and the processing industry hit back

The government was quick to point out that of the 13bn litres produced annually, only 7bn litres went into fresh milk. Robert Wiseman Dairies said the problem for the milk industry was not that it was producing too little milk, but that it was producing too much. 'Unfortunately the volume of milk produced by the dairy farming sector in the UK is such that three in every 10 litres is having to be sold in commodity markets.'

Arla chief executive Tim Smith said that importing liquid milk was unlikely. 'Anyone contemplating importing milk is committing financial suicide. The eye-watering costs of transporting milk from abroad make it unviable. The market price will be adjusted as we near the balance of supply and demand. But it is all down to market forces. We are still in a position of over supply.'

An overview

We should remember that this sector still receives substantial CAP subsidies, even if they are reducing. There is also a distinction between the number of farms going out of production and the volume of production. If smaller (and often unavoidably less efficient) farms mainly go out of production, the effect on volume will be muted, indeed other producers may expand if the price is sufficiently attractive. Of course, a decline in the industry in, say, western England could have landscape and social effects, but that is another matter.

The price UK dairy farmers receive is the lowest in Europe and this in part no doubt reflects the market power of retailers, but that same market power has led to falling food prices and hence a positive effect on the overall level of inflation. Dairy farmers sometimes claim that they are making a loss, but this may be after labour costs (mostly those of the family) have been paid out of the business.

There is no doubt that dairy farming is a particularly demanding type of farming and the rewards are not that great for smaller enterprises. But whatever is done we should not increase the level of subsidy. Production would have to fall a long way before fresh milk supplies are threatened.

1 comment:

Unknown said...

The CAP subsidises food production. Just as we subsidise health, education, and houses. If we do not subsidise food production, then we will have more famines, and have our food security destroyed. You should campaign for Africa to have have CAP.